Germany considers to follow the steps of other Western European authorities and to possibly impose a ban on trading in binary options and contracts for difference (CFDs), The Times of Israel reported late last week, citing Anja Schuchhardt, a press officer of the Federal Financial Supervisory Authority (BaFin) of Germany.
“Since the German Retail Investor Protection Act (Kleinanlegerschutzgesetz) came into force, product intervention (section 4b of the WpHG) has been one of the tools available to BaFin, but it is always regarded as a last resort,” Schuchhardt said. “In the future, therefore, BaFin will continue to consider carefully and with a sense of proportion which specific steps are necessary, firstly with a view to consumers, who must be effectively protected, and secondly with a view to the related interventions in the market which should be kept to the absolute minimum required,” she added.
This is not the first time when Germany hints at ban on certain financial instruments. In mid-September German newspaper Die Welt cited Elisabeth Roegele from BaFin as saying that prohibition of margin trading and binary options in the country is possible. She referred to such instruments as being dangerous and presenting high risk. Any intervention measures, however, need to be taken very carefully and well measured.
The German financial regulator follows suit of other reputable authorities in Europe. Belgium banned from 18 August the distribution via online channels of over-the-counter (OTC) binary options, spot forex, and CFDs with leverage. France also announced recently that it is in the process of developing a bill that would prohibit online advertising of “highly speculative and risky financial contracts”, such as binary options, forex and CFDs with a leverage greater than 1:5. Meanwhile, the Netherlands has also announced that it considers ban on the advertising of such instruments, calling them “toxic investment products for consumers”.
Binary options are a very controversial trading instrument. They are the closest thing to gambling in the online trading world. Investors guess whether the price of a certain instrument, would go upwards or downwards within a pre-determined time frame. Once the time is up, the option is deemed expired and the bet is settled. Depending on the outcome, a trader either collects a profit, or loses money.
In most jurisdictions, binary options are regulated, in others they are not lawfully allowed, while in third they are not forbiden, but neither are there any authorized brokers that offer them. In the UK and Cyprus, the country of choice for most brokers regulated in Europe, binary options are regulated. In Great Britain, they fall under the supervision of the Gambling Commission, while in Cyprus they are regulated by the Cyprus Securities and Exchange Commission (CySEC). Both authorities have alerted about receiving an increased number of complaints against binary option brokers. In this concern, the Cypriot financial watchdog introduced earlier this year tougher rules on entities that offer this type of instruments.